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Do Friends Influence Purchases in a Social Network?

36 Pages Posted: 20 Apr 2009  

Raghuram Iyengar

University of Pennsylvania - Marketing Department

Sangman Han

Sungkyunkwan University - School of Management

Sunil Gupta

Harvard Business School

Date Written: February 26, 2009

Abstract

Social networks, such as Facebook and Myspace have witnessed a rapid growth in their membership. Some of these businesses have tried an advertising-based model with very limited success. However, these businesses have not fully explored the power of their members to influence each other’s behavior. This potential viral or social effect can have significant impact on the success of these companies as well as provide a unique new marketing opportunity for traditional companies.

However, this potential is predicated on the assumption that friends influence user’s behavior. In this study we empirically examine this issue. Specifically we address three questions - do friends influence purchases of users in an online social network; which users are more influenced by this social pressure; and can we quantify this social influence in terms of increase in sales and revenue.

To address these questions we use data from Cyworld, an online social networking site in Korea. Cyworld users create mini-homepages to interact with their friends. These mini-homepages, which become a way of self-expression for members, are decorated with items (e.g., wallpaper, music), many of which are sold by Cyworld. Using 10 weeks of purchase and non-purchase data from 208 users, we build an individual level model of choice (buy - no-buy) and quantity (how much money to spend). We estimate this model using Bayesian approach and MCMC method.

Our results show that there are three distinct groups of users with very different behavior. The low-status group (48% of users) are not well connected, show limited interaction with other members and are unaffected by social pressure. The middle-status group (40% users) is moderately connected, show reasonable non-purchase activity on the site and have a strong and positive effect due to friends’ purchases. In other words, this group exhibits “keeping up with the Joneses” behavior. On average, their revenue increases by 5% due to this social influence. The high-status group (12% users) is well connected and very active on the site, and shows a significant negative effect due to friends’ purchases. In other words, this group differentiates itself from others by lowering their purchase and strongly pursuing non-purchase related activities. This social influence leads to almost 14% drop in the revenue of this group. We discuss the theoretical and managerial implications of our results.

Suggested Citation

Iyengar, Raghuram and Han, Sangman and Gupta, Sunil, Do Friends Influence Purchases in a Social Network? (February 26, 2009). Harvard Business School Marketing Unit Working Paper No. 09-123. Available at SSRN: https://ssrn.com/abstract=1392172 or http://dx.doi.org/10.2139/ssrn.1392172

Raghuram Iyengar

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Sangman Han

Sungkyunkwan University - School of Management ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Sunil Gupta (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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